Dollar takes a hit

By Peter Goldmark

Newsday

“Money talks,” the old saying goes. The U.S. dollar has been the world’s reserve currency for decades.

That means the world has made its trades in dollars, settled accounts in dollars, and that the dollar has been “the safe haven” investors looked to when the going got tough.

That is changing. And if we don’t get our financial affairs in order, starting with the deficit, movement away from the dollar will continue.

The Chinese are already telling the world that a global financial system dominated by the Atlantic nations is no longer either fair or workable. And the financial collapse of 2008 — driven by irresponsible American financial institutions peddling phony mortgages, debt run wild and Bush-era abdication from policing the markets — rattled faith in America around the world. Suddenly our financial system looked not so safe and not so wise.

Budget deficit

Today the United States has a growing budget deficit and a huge trade deficit, the latter largely because we’re hemorrhaging roughly $400 billion a year for imported oil. If we were a patient, our doctor would tell us: “You’re overweight, your blood pressure is too high — and your addiction is going to kill you one of these days.”

If the dollar began to be replaced as the world’s reserve currency, it would mean a drop in U.S. standard of living — because when the dollar gets weaker, you and I have to pay more here at home for everything imported from overseas. That’s all bad enough.

But meanwhile, the countries with piles of foreign reserves, such as China and the oil emirates, created sovereign wealth funds to deal with the ups and downs in their own revenues from oil or export surpluses, and to avoid having those funds sit idly in low-interest U.S. Treasury bonds.

These sovereign wealth funds, which make long-term investments, now control trillions of dollars of capital and are often used by the nations that control them to advance national policy. When a Saudi sovereign fund buys farmland in an undeveloped country, that’s not trade; that’s trying to lock up a food supply for themselves in the future.

Growth and technological progress have always required long-term investors. Who will the next generation of long-term investors be? Who will shape the systems we use for transportation, for generating and distributing electricity, for conserving and purifying water?

Governments

Historically, the long-term investors have usually been governments, or government-backed. It was government-backed credit that built a lot of the framework — our canals, railroads, interstate roads and airports — that allowed the United States to become the world’s largest economic power.

But in the United States, our present politics make it hard to talk about intelligent, long-term, government-sponsored investment at the national level. So the sovereign wealth funds, by default, take center stage as important, trend-creating long-term investors. And the sovereign wealth funds respond to the wishes of other sovereigns — not the United States.

It’s a tough world out there, and Americans are used to calling a lot of the shots. But a country can’t be as fat, as out of shape, and as out of balance fiscally as ours and still expect to play on the team that makes history, rather than the teams that have to live with the history others have made.

Peter Goldmark, a former publisher of the International Herald Tribune, headed the climate program at the Environmental Defense Fund. He wrote this for Newsday. Distributed by McClatchy-Tribune Information Services.